Saturday, August 21, 2010

Target Practice(s)

It's been fascinating to watch the jihad that the Left has been conducting against my former employer, Target Corporation. A lot of what you read in the mainstream media is rot, of course: Mitch Berg, who has been a one-man truth squad during this election cycle, does an outstanding job of debunking the "institutional investor concern" meme that the Star Tribune floated yesterday. The money graf (in more ways than one):

And as Mitch also points out, the institutional investors in question are boutique "social responsibility" funds of the sort that (a) prefer moral vanity to making money and (b) almost always underperform the market. But we'll leave that aside for the moment.

Even though Mitch is right that the institutional investors in question are gnats, there have been multiple reasons why Target has struggled with the machinations of those who wish the company ill right now. Target Corporation employed me for nearly a decade and I believe I have a few insights into how Target operates. I'd like to offer a few of the things that Target execs are weighing right now:

Target makes its money from impulse buying. We would talk quite a lot about the "typical Target guest." When I worked there, our assumption was that this guest (customer) was:

About 40 years oldFemaleMarried, with younger children

Suburban

Probably drives a minivan or SUV (the better to carry stuff)Family income over $50K (probably about $65K now)

In other words, the typical Target shopper was there to pick up the basics, but likely had enough money to buy something on impulse on most visits to the store. Target shoppers are, in the main, more wealthy than Walmart shoppers, but because Target has to compete with Walmart on commodity items, Target can't make a lot of money on those purchases. So the key is to get the shopper to buy something else that delivers a higher margin: a cute blouse, Buzz Lightyear pajamas for the kids, a book or CD -- something like that.

Although Target has gone away from this design in more recent prototypes, that is why you used to have to drag your way through about five other departments before you got to health and beauty or the laundry detergent. Walmart is able to make more money on commodities because the Walmart buyers are geniuses at squeezing their vendors and the boys in Bentonville have perhaps the best supply chain logistics in the history of the world. While Target lavishes great attention to these matters and does a great job, they can't beat Walmart on "back of the house" procedures, so they have to make up the difference on the sales floor.

In the main, gays have discretionary income. Yes, it's a generalization, but there's no point in denying it -- many gays make good money and because they don't, in the main, have the sorts of financial commitments that the 40-year old suburban mom has. I'd wager that there aren't too many people living in the Loring Park area who are paying for ice time or hockey equipment every year. That makes gays a small but coveted demographic. Target couldn't care less about the gay lifestyle, except that in many cases it means a potential gay shopper will have more money to spend in the downtown store than the woman in Apple Valley who arrives in the Cedar Avenue location in a 2005 Murano.

Target's "philanthrophy" is all about image and image is good business. I was heavily involved in the Target Volunteers program when I worked there. We did things that were beneficial to the community. There's no question that when we cleaned up the shoreline along the Mississippi in St. Paul, or gave thousands of pounds of food to the Sabathani Community Center, it was a useful exercise. It was also good for Target's business. Image is a huge consideration for Target and it has had to be. It doesn't help the company if a certain percentage of the bien pensants thinks less of Target because they believe the rhetoric of the Human Rights Campaign, especially if the bien pensants have coin.

Still, Target has a business to run. And if you want to run a successful business, you need talented executives to manage your various operations. And talented executives don't come cheap. In fact, top Target executives are generally "rich." Target is based in Minnesota and if Mark Dayton becomes governor and starts taxing the snot out of talented executives, it will hurt Target's competitiveness in the market. The state income tax in Bentonville, Arkansas is somewhat less than than it is here right now. That could change. Meanwhile, there are other retailers who are headquartered in places like Texas, where the state income tax is zero. If you are a talented retail executive, are the advantages that Minnesota provides enough to make you want to live here, especially if the cost of living is higher? If Target wants to compete in the executive marketplace, Tom Emmer's approach will make it easier for Target to attract and retain top talent. Seen in that light, a $150,000 expenditure on Emmer's behalf would seem pretty wise.

So there you have the question. Are the potential lost sales from a small but noisy demographic (and the collateral damage from bien pensant customers) more damaging to Target than the long-term effects that a punitive tax rate will have on its executive team? That's the question that Gregg Steinhafel and the rest of his team is facing. And it's also a question that interests Wall Street, much more than the machinations of the gnats the Strib detailed yesterday. And if Target becomes less competitive in the marketplace long-term because its management is weaker, that has pretty severe implications for Minnesota.

Maybe Mark Dayton can find some sort of "supercomputer" to figure out the optimum tax rate for hoovering the wallets of Target executives (and Medtronic, and United Health, etc.) for the Better Minnesota he imagines, but it would require a level of insight that Dayton hasn't shown at any point in his career. Dayton's family once owned and operated the business that is now Target Corporation, but it's no coincidence that Gregg Steinhafel is at the helm there today, rather than Mark Dayton.

If you love winter sports, Minnesota is a great place to be. No question about that. I don't mind winter except when I'm caught in a snowstorm on 35W during my commute.

The summers in Texas are like the winters here -- it gets so damned hot in Dallas and Houston that it can be unbearable, so that's a tradeoff. The tax differential is a pretty big factor, though -- no income tax (Texas) vs. about 8% here. And if Dayton gets his way, potentially a lot more.